Net Worth Update – October 2018

Each month, I share a net worth update for the Brewing FIRE household. This brief summary of our financial standing serves as a progress report on our journey to financial independence.

In addition to giving a snapshot of our net worth, I will compare our progress to the previous month. I will also comment on any notable changes to our finances. Finally, I will share my “Chart of the Month,” which should add some color to my saving and investing strategy.

October 2018 Net Worth

We use Personal Capital to track our net worth. Personal Capital makes it easy to track all of our banking accounts, investing accounts, credit cards and loans all in one place. Personal Capital also has numerous other functions for analyzing your investment holdings, asset allocation and performance, as well as some great retirement planning tools.

October was a good month on the non-financial front. It’s prime leaf-peeping season in the Northeast, so we made sure to go hiking and enjoy the fall weather as much as we can before winter arrives.

We also celebrated Baby BF’s first birthday, or as I call it- “one year of keeping the baby alive.” All in all, it was a great success! Kidding aside, she is a great little human, and we’re very fortunate to have such a classy, chill baby.

Always smiling…

We made another large purchase in October- a catalytic wood burning stove! The last few winters, we’ve been using a stove that came with the house. It definitely helped to supplement our heat, but it was also quite inefficient. When I hauled it out I found that it was manufactured in 1974, so we can assume the efficiency was in the 50% range at best. This year we upgraded to a Blaze King that should be around 80% efficient. My goal is to use the stove to cut our oil bill in half this winter. I will update on our progress as we go.

Month-Over-Month Comparison

Enough about leaves, babies and stoves. It’s time to talk about the Net Worth Massacre of ’18. Just kidding. People treat a market dip like it’s the beginning of End Times. Relax, it’s only a correction.

cor-rec-tion

noun

a change that rectifies an error or inaccuracy.

See that? Efficient market theory would suggest that we are correcting for a reason, and the reason in this case is that equity prices may have gotten ahead of themselves. That’s all. Everyone breathe, and move on.

In all honesty, there’s only one part of the net worth breakdown that bothers me, and that’s the cash position. See, I can’t control the value of my stocks and funds, or the value of my house, but I can control my saving and spending habits.

Investment Breakdown

Cash: We drew down our cash cushion slightly this month, but still have plenty of a buffer. As you could guess, this is due to the purchase of the wood stove. There’s no real concern here.

Looking at the bigger picture, we are probably going to start building up a larger cash position. We have a few potential expenses coming up regarding my rental property, and we need to start saving up for our front-loaded 2019 Roth contributions.

Also, I want to have a little bit of cash on hand in case stocks go on sale in a more meaningful way.

Equities: our investment balances are down across the board, due to the aforementioned market dip. I already covered my basic plan in my latest Short Pours post. I’ve been selling risky and cyclical positions, leaving dividends in cash, and keeping a portion of new contributions in cash.

I have also started a small position in an aggregate bond fund. I’ve never held bonds before, but this is mostly because yields have been abysmal for years. They’re finally starting to actually yield something.

This is how I see it: I’ll keep a small portion of our money invested in bonds for the relative safety and to collect the ~3% yield. If interest rates continue to rise, I’ll leave the money in bonds and collect the higher yield. If we see another recession, then the bond fund will appreciate, and I can rotate the money back into equities again. It’s a win/win in my book.

Home Equity: Nothing much to report here. We continue to make additional principal payments on our house, with the hopes of paying it off in the next 10 years.

Chart of the Month: Purchasing Power and Interest Rates

Speaking of home equity and the value of housing. This month we’ll look at the relationship between home values, purchasing power, and interest rates.

When you apply for a mortgage, your monthly payment is calculated based on the amount borrowed, term of the loan and the interest rate. The more you borrow, the more you pay, and same goes with the interest rate.

30-Year Fixed Mortgage Rates, 2008-Present

As you are probably aware, we are currently in an increasing interest rate environment. Between 2008-2015 we were at 3.25% for a 30-year fixed rate mortgage. But now rates are rising again. This means the economy is doing well and we are finally ‘normalizing’, but it also means that it costs more money to borrow.

For folks that budget how much they want to pay for a home in terms of monthly payments, the interest rate is critical. As interest rates rise, the purchasing power (based on monthly payment) decreases.

Purchasing power vs. interest rates,based on a $1000 monthly payment

Let’s say your family has budgeted $1000/month for a mortgage payment. We’ll assume no property taxes or insurance for this exercise. If you bought your home any time between 2008 and 2015, you could borrow up to $300,000 and stay under budget. If you went house shopping today, though, your maximum budget is $230,000. That’s a huge difference, and it’s all due to interest rates.

Thanks again for following along with our monthly progress report, and please let me know what you think in the comments. Cheers!

nice work keeping the baby alive. i like that purchasing power chart. you can guess the trend is going to go that was but to quantify it has tremendous value. i hope people got those rates locked in a few years ago. that’s the case i could make for a 30 year mortgage too. if rates go up you could make minimum payments and just buy some bonds at a higher rate. i had a 5.25% savings account around 2006, for instance.

We bought our home in 2015 and got a 3.99% APR- not bad. I totally agree with your thinking; If I can get 4% or higher in savings/CDs/bonds, I will start throwing our ‘principal money’ into those investments to keep us more liquid and at least cancel out the mortgage interest. It’s kind of exciting to finally see returns from ‘risk-free’ investments!

Keeping the baby alive is important, I would say haha Congrats on making it one year. I don’t really sweat the market corrections too much. There is only so much you can do and you can’t control the market swings, right? Plus, you’ll feel the swing up next month once the market continues to improve in the other directions.

Totally agree. In almost all cases, taking a ‘hands off’ approach to investing (ie, ignoring market swings) is the best course of action. I remember in 2008-2009- it was very early in my career, and my 401k balance went down almost every month, even with my contribution. I spent a full year thinking, “I’m just throwing money into the abyss,” but I kept going. Eventually it pays off.

With the baby, I think the net worth rate is still going great. My wife began a side hustle when we had a baby. And this was in addition to the salary she was drawing as part of her maternity leave. I really have to hand it to her, but the six months of extra income really saved us from going down after.

The baby has definitely boosted expenses for us- mostly daycare, but diapers and wipes add up too. Not too bad, though, considering it’s a temporary cost and she’ll be in our public school system in a few years.

She took up technical writing in the topic she has experience in: embedded systems. Finding the client was a tough task but she wrote for local labs – journals and manuals – which paid good money for the time she spent. The upshot with these labs was they were not in a hurry, so Darla could take good time to balance between. 🙂

That’s a great idea! I’ve wanted to pursue technical writing- I write a fair amount of white papers, SOPs and technical manuals as part of my job so it would be an easy transition. The problem for me was also finding clients, I’m not even sure where to look. Anyway, maybe something I’ll pursue as I get closer to leaving the 9 to 5. Thanks for the input!